Egghead adapts to regain revenue
Working to regain market share and boost flagging revenues, Egghead is expanding its hardware business and online presence.
It faces a number of hurdles from competing against retail giants with its small-store format, a growing presence among sites that allow software downloads, and a souring financial picture.
Quarterly revenues on a year-to-year comparison have fallen by 50 percent for more than a year and red ink has reached $13 million over the course of two years. The company, however, surprised Wall Street in the fourth quarter with a rise in profits due to holiday sales. Egghead is scheduled to report its first-quarter results on May 15.
But this seller of computer software, hardware, peripherals, and accessories is looking to fix its financial woes with several initiatives.
Egghead is launching a new Web site tomorrow; it's also planning to expand its business with 15 superstores. In addition, it has announced an acquisition of a mail-order hardware and software business, along with a new management team to guide the company.
One analyst applauds the moves. "What the Net brings to Egghead is the attractive things it brings to everybody: an unlimited customer base at a relatively low cost," said John Taylor, an analyst with Arcadia Investment. The playing field is the same no matter how big or small a company you are, and the costs to run an online business are much cheaper than the real thing, he added.
Nevertheless, the online world is not a competition-free haven. If anything, the number of competitors will grow at a faster pace because of the relatively low barriers for setting up shop online.
But Egghead has one thing that many of the new sidekick start-ups nudging online don't have: brand recognition. That might be the edge that pushes this company back to financial stability.
"Egghead has a brand that people recognize," Taylor said. The company's relatively new management also brings a different kind of discipline to software resellers: one that values slightly older equipment and software rather than the latest and hottest thing.
Taylor explained that new CEO George Orban, whose appointment was announced in January, comes from the world of selling yesterday's hot items at discounted prices. Orban has been a board member of discount clothing chain Ross Stores since 1982, which sells slightly outdated brand names.
"There is still potentially a nice market for older machines. Onsale (ONSL) does a similar kind of thing and there appears to be some interest in that area," the analyst stated.
Taking a cue from Ross, Egghead plans to propel itself into the arena of direct marketing of other companies' excess software and hardware inventories over the Internet.
For example, it announced yesterday the acquisition of Surplus Software in a $31.5 million stock swap deal. "This [acquisition] is a move into direct sales. [Surplus] generates revenue from direct sales through the mail and its Web site, and this is an attempt to increase revenue," Taylor said.
"They brought some people on who know how to market directly via the mail or Internet...people who have skill sets that they do not have." He added this deal gives Egghead access to hardware vendors with which the company has had little contact before.
To build its financial foundation, Egghead previously announced it would close 77 stores of its 156-unit chain. It said this year will be marked with cutbacks to reduce operating losses, improved business operations, and a devotion to resources to spur renewed growth.
The company has also been remodeling and relocating some stores to accommodate the larger 5,000-square-foot format. More big stores are on the way; the chain expects to add 15 larger-format stores by the end of fiscal 1998.
So despite a face-lift internally and externally, the company has decided to take a more aggressive approach to direct business, and the acquisition of Surplus will thrust the company back into the direct competition ring.